Archive for August, 2009

Just months before his now-infamous Ponzi scheme collapsed, Bernie Madoff snookered a Merrill Lynch adviser who was attempting to perform due diligence on him for a foundation that serves the elderly, according to a lawsuit filed in federal court in Florida last week.

In the complaint, MorseLife Foundation is seeking at least $33 million in damages from Merrill Lynch & Co. Inc., claiming that the New York financial advisory firm was taken in by Mr. Madoff during a face-to-face meeting just several months before his fraudulent investment empire collapsed.

Now in prison for running a $65 billion Ponzi scheme and wiping out the fortunes of a lengthy list investors, he met with the Merrill adviser, John S. Lacy, in July of 2008.

Mr. Lacy, a vice president with Merrill’s global wealth management group in West Palm Beach, along with foundation executives, was part of a group in a due diligence meeting on behalf of MorseLife, which filed the lawsuit last Friday in U.S. district court in Miami.

As of July 2008, the portfolio was worth $32.4 million.

After 2006, with the hope of building its relationship with the foundation, Merrill Lynch expanded its services, which included advising MorseLife on its investment policies, strategies, asset allocation risk tolerance and specific investments not managed by Merrill Lynch, the lawsuit claims. MorseLife in its suit is alleging that Merrill Lynch was negligent.

The U.S. trustee for Delaware, where DBSI is incorporated, will ask a bankruptcy court Tuesday to appoint a trustee to run the company, ending DBSI owners’ control.

“It appears that certain of the debtor’s officers and directors, including (President) Douglas Swenson, have engaged in misconduct, fraud and mismanagement which collectively caused damage to the debtors’ investors and creditors,” the U.S. trustee’s office said in a court document Monday. The office is an arm of the U.S. Justice Department.

Swenson started DBSI in 1980. The company, formerly based in Meridian, manages commercial property investments for well-heeled investors around the country.

Before it filed for bankruptcy in November, DBSI controlled 248 commercial properties around the nation and had more than 8,500 investors. Its holdings include several shopping centers and office buildings in the Treasure Valley. DBSI collapsed as real estate values fell and lending dried up.

DBSI was sued by investors in October after it stopped paying them and was sued for fraud by Idaho securities regulators in February. Those lawsuits are pending. DBSI has denied the state’s fraud allegations.

What’s left of the company is now in Boise. While a Chapter 11 bankruptcy filing allows a company to reorganize, the DBSI bankruptcy is expected to end in the company’s dissolution.

The U.S. trustee’s office – which monitors the conduct of companies involved in a bankruptcy – sought its motion based on an interim report on the company’s affairs filed Monday by a court-appointed examiner, Joshua R. Hochberg, who spent months reviewing DBSI’s internal records.

Among Hochberg’s findings:

• DBSI had “serous cash flow problems and operating losses” when it sought investors in a 2008 notes offering, which is like a prospectus.

• Most of the notes’ proceeds, which totaled about $90 million, were not truly “invested” in ways the notes offering promised.

The measure would make individuals or firms that provide “substantial assistance” in a fraud subject to investor lawsuits, Specter, a Pennsylvania Democrat, said on the Senate floor last week. The Supreme Court has decided two cases since 1994 that restrict investors from recouping losses from fraud accomplices. The House isn’t considering similar legislation.

“It would be an appropriate change,” said Donald Langevoort, a securities law professor at Georgetown University. “Secondary actors who play a big enough role in perpetrating a fraud should bear responsibility just like anyone else and shouldn’t be able to hide.”

Shareholders are barred from suing parties that have only an indirect role in a fraud after Supreme Court decisions that limited liability to those directly and publicly involved in the scheme. The Specter measure would upend rulings in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. of 2008 and Central Bank of Denver v. First Interstate Bank of Denver.

Prior to the rulings, investor lawsuits against fraud accomplices were common, Langevoort said. The 1994 Central Bank decision was a “major gift” to individuals and corporations that aided in a fraud, he said.

The Securities and Exchange Commission today charged Bank of America Corporation for misleading investors about billions of dollars in bonuses that were being paid to Merrill Lynch & Co. executives at the time of its acquisition of the firm. Bank of America agreed to settle the SEC’s charges and pay a penalty of $33 million.

The SEC alleges that in proxy materials soliciting the votes of shareholders on the proposed acquisition of Merrill, Bank of America stated that Merrill had agreed that it would not pay year-end performance bonuses or other discretionary compensation to its executives prior to the closing of the merger without Bank of America’s consent. In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008. According to the SEC’s complaint, the disclosures in the proxy statement were rendered materially false and misleading by the existence of the prior undisclosed agreement allowing Merrill to pay billions of dollars in bonuses for 2008.

Bank of America has agreed to pay a $33 million penalty to settle government charges that it misled investors about Merrill Lynch’s plans to pay bonuses to its employees.

In seeking approval to buy Merrill, Bank of America told its shareholders that Merrill agreed not to pay year-end bonuses without Bank of America’s consent. But the Securities and Exchange Commission says Bank of America had authorized New York-based Merrill to pay $5.8 billion in bonuses.

The bonuses amount to nearly 12 percent of the $50 billion Charlotte, N.C.-based Bank of America paid for Merrill.

The SEC says Bank of America agreed to pay $33 million to settle the charges without admitting or denying the allegations.

If you own a Lehman Brothers structured product issued in Europe, the basic components you are ultimately invested in are a bond and an option. The bond is a zero coupon, which means it is issued at a price well below par. The value you have in the bond is whatever price you have bought it at, minus a bit more if the issue is newly launched and minus a bit less if it is nearing maturity. The bond will have been issued by and in the name of Lehman Brothers.

In addition, there is an option that will have been bought from a counterparty. That counterparty may have been the options desk at Lehman, or it may be the same desk at another bank. If that option – based on the performance of an underlying, typically an equity index, such as the FTSE – is in the money, ie it is performing better than anticipated, then the counterparty will owe money to the investor.

Valuing the option that is closed out as a result of the Lehmans bankruptcy is based on the probability of that option being at an expected level at expiry. This is hi-tech mathematics, but the important element for the investor is that these proceeds will have been put to one side by the counterparty, either in cash or liquid securities like US Treasuries. As the money is specifically put to one side it ranks as a secured obligation of the counterparty.

Once the zero coupon bond and the option have been valued, they are then packaged into a total amount that is then multiplied by the market value of Lehman bonds. Taking Lehman bonds at 50 – the level they were quoted at earlier this week – and the zero coupon at 68 and the option at 10: the bond plus option equals 78, multiplied by 50% leaves the investor with a return of 39.

One oddity of the structured product is that the money from the option – if there is any – is secured, and the money from the bond is unsecured. As a result, the option proceeds rank further up the creditor priority chain on bankruptcy.

This is all conditioned by any steps taken by the regulators in Europe. Apparently, the Nordic, German and Swiss regulators, as well as the UK Financial Services Authority are looking into ways to ensure that retail investors may be protected against the worst of the losses. They will try and look after the ‘mom and pop’ investor as well as they can.

In Asia, the Hong Kong Securities and Futures Commission and the Monetary Authority of Singapore have told investors owning Lehman Minibond paper that they could receive substantially less than their initial investment and that the separately kept collateral and the swap agreements that back the notes are subject to security in favour of the trustee, who is required to act in the best interests of the investors.

Securities arbitration and litigation on behalf of institutional investors, municipalities, high net worth investors, retail investors, individual investors, and employees in California, Texas, New York, Washington D.C. and around the country, including the major metro areas of Los Angeles, San Francisco, San Diego, Dallas, Houston, New York, and more. We are securities fraud lawyers/investment fraud attorneys focused on all types of financial fraud cases.